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Appendix E
Analysis of CDOW's Existing Rates and Service Costs

This section estimates the extent to which CDOW's existing rate differentials correspond to average cost methodologies. Ordinarily this would require a detailed engineering-based cost-of-service study. Since such a study is beyond the resources of this effort, a more aggregated approach using publicly available data from CDOW is used. Readers should use caution in interpreting the results of this more limited analysis.

The purpose of this analysis is to develop an approximation of CDOW's existing rate differentials, using average and proportionate cost allocation techniques alone. If this approach approximates CDOW's existing inside/outside rate differentials, it would suggest that its rates are reflective of overall average cost differences, including those derived from differences in distance and elevation. It would not indicate, however, that density and economy of scale considerations are priced into CDOW's current zone rate structure. In fact, to the extent that cost differences due to these latter factors fail to follow the patterns of the rate differentiated zones, it would suggest the contrary.

O&M consists primarily of two separate cost centers: plant and conveyance. Each is addressed separately to estimate whether the 1.98-to-1 ratio for CDOW's O&M component is based on extra pumping and pressurization costs for areas outside the City. Since separate O&M costs for these two functions were unavailable, they are estimated based on CDOW's respective employment for each of these two functions.

Employment can be used as a rough estimate to divide O&M costs between these two cost centers because electrical costs (which are ordinarily more treatment plant intensive) are also incurred for pumping treated water, which is a conveyance function. The only adjustment that needs to be made to apply this approach is for zone-related pumping capacity housed within CDOW's treatment plants. For purposes of this analysis, it is assumed that 30 percent of CDOW's estimated plant-related employment is for plant-based pumping facilities.

This methodology will yield an order of magnitude estimate as to whether CDOW's current inside/outside-city rate differentials are reflective of its pressure-zone related costs. The data used as the basis for verifying the plant and conveyance share of CDOW's current user charges are summarized below:

  • In 1995, 260 persons were employed in CDOW's plant operations and 560 were employed in conveyance (distribution) operations. [57] Plant operations include potable water treatment and in-plant pumping facilities. Conveyance system operations include maintenance of transmission and distribution pipelines, fire hydrants, and main line valves. After adjusting for in-plant pumping facilities that are conveyance-related, it is estimated that plant operations involve about 180 employees, and conveyance involves about 640 employees.

  • About 1,350 miles, [58] or about 27 percent, of the approximately 5,000 miles of transmission and distribution pipelines maintained by CDOW, are estimated to provide service within the City of Cleveland.

  • In 1995, the City accounted for about 40.6 percent of metered water sales.

  • About 28% of CDOW's pumping capacity is estimated to provide service inside the City

  • These data are applied in Table 3 to estimate whether the current rate differentials between effective outside and inside city rates reflect the actual pumping and pressure-related cost differentials between these two areas.



Table 3: Approximate Plant and Conveyance Cost Components Attributable to Inside and Outside City Water Usage, and Effective Average Rates

Basis of Plant/Conveyance Allocation 1996 (Millions of $) Basis of Inside/Outside Allocation Inside-City Outside-City
Metered Consumption, 1996




Plant (MCF)


3,757,692 5,571,975
Conveyance (MCF) [59]


3,757,692 4,773,583
O & M Cost




Plant Employ + chem $23.885 Metered sales $9.626 $14.260
Conveyance Employ - chem $76.997 Miles of pipe $20.789 $56.208
Total O&M Cost
$100.882
$30.415 $70.467
Effective O&M Rate Per MCF




Plant


$2.56 $2.56
Conveyance


$5.53 $11.77
Total O&M Rate


$8.09 $14.33
Debt and Other Cost




Debt Svc
$40.636 Pumping capacity $11.38 $29.26
Other
$35.450 Pumping capacity $9.93 $25.52
Total Debt and Other Cost


$21.30 $54.78
Effective Debt and Other Rate Per MCF




Plant

Metered sales $1.79 $1.99
Conveyance

Miles of pipe $3.88 $9.15
Total Debt & Equity Rate


$5.67 $11.14
Total Effective Rate Per MCF




Plant


$4.36 $4.55
Conveyance


$9.41 $20.93
Total Effective Rate


$13.76 $25.48


As is shown in Table 3, the O&M rate for plant facilities in 1996 is equivalent for both inside and outside-city customers. This is as it should be since, disregarding economies of scale, it does not cost more to produce a unit of water for an outside-city customer as for an inside-city customer.

The estimated conveyance O&M rate is greater for outside city customers by a ratio of about 2.13-to-1. The total O&M rate is greater for outside customers by a ratio of about 1.77-to-1, while the estimated debt/other rate is greater by a ratio of about 1.96-to-1. The total estimated rate per MCF is greater for outside city customers by a ratio of about 1.85-to-1. This is about 6 percent less than CDOW's current effective 1.98-to-1 inside/outside rate differential, and is within the margin of error of this estimation methodology.

Since the outside city area requires about 2.7 miles of pipe for every 1 mile of pipe serving the area inside the City an average cost approach would allocate about 2.7 times as much conveyance costs to outside city customers. And, indeed, when this approach is applied in Table 3, the estimated inside/outside-city rate differential is within a few percent of the actual differential. Furthermore, the foregoing exercise results in inside and outside plant O&M costs being virtually identical. Both of these results tend to confirm that CDOW's rates correspond to an average or proportionate cost approach.


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Notes

57. Official Statement, CDOW, May 1, 1996, p. 2-12.

58. The CDOW engineering department estimates about 1,700 miles of mains (pipe) are located within the City. However, some of these mains provide service to areas outside the City as well. The City of Cleveland Public Works Department estimates there are 1,250 centerline miles of City streets, which ordinarily corresponds closely to the miles of pipe needed for local conveyance. For purposes of this analysis it is assumed that 1,350 miles of pipe are for inside city service to account for interconnects and shared mains. This would mean that 350 miles of pipe inside the City provide service primarily to outside city customers.

59. Outside city conveyance flows are reduced by usage attributable to the master meter communities of Cleveland Heights, Lakewood and East Cleveland since the major trunk lines serving these communities would be required for other portions of CDOW's service area.

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